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Time to shed that debt?

Are your bills overwhelming? Perhaps the debt that overshadows your life took years to build. Or maybe it's the result of a financial crisis, such as a job change. In either case, being faced with a mountain of debt can cause sleepless nights and threaten your sense of well-being.

Good Debt, Bad DebtWhen used responsibly, credit is a powerful tool that allows you to swing such large-ticket items as a house, cars, a college education and glorious vacations. But debt turns sour when it a) makes you uncomfortable, b) puts a crimp in your cash flow, and c) prevents you from saving for the future.

A good guideline to determine if you're in over your head is to figure your debt-to-income ratio. Add up your monthly payments on installment debt (not including mortgage payments), and divide that number by your monthly pre-tax income. Experts recommend staying below the 15 percent ratio, so that you have ready cash for savings and unexpected expenses. If your debt-to-income is 20 percent or above, find ways to reduce it.

Saving GracesWith self-discipline and smart money management, you can gain control over your finances. Here are some ways to begin:

Follow a strategy - First, determine which loans are causing the most strain on your pocketbook - generally, those with a high interest rate and fees. Many bank and store credit cards charge 18-22 percent a year or more in interest. Consider a debt consolidation or other loan options to eliminate high interest rate balances. Next, make it a habit to pay more than the minimum. Credit card companies set low minimum payments of only about 2-5 percent of your balance. Paying the minimum on a credit card balance of $1,000 at 18.5 percent interest would take eight years and cost about $1,000 in interest. By adding only $10 a month to the minimum payment on a balance of $1,000 at 18.5 percent interest, you would save over $500, plus make the final payment years sooner.

Refinance your mortgage - Refinancing to a lower rate could help you free up possibly hundreds of dollars a month - money that could be used to pay off higher-interest debt, or invested at a favorable return. Determine first if you intend to stay in your present home long enough to recoup closing costs.

Consolidate with a home equity loan - This type of loan lets you borrow a lump sum equal to a portion of your home's market value, minus your mortgage balance. A line of credit offers additional flexibility, allowing you to draw from it as needed while paying interest only on that amount. Because the interest paid on a home equity loan or line of credit is generally tax-deductible, it's often an effective way to consolidate and pay down debt. Be aware, however, that an inability to meet your loan payments could put your home ownership at risk.

Click here for other articles from Lutheran Brotherhood. If you are having trouble with creditors and need to devise a debt repayment plan, the Consumer Credit Counseling Service (CCCS) may be able to help. Call its toll-free number (1-800-388-2227) to be connected with a local office.